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Investment Sustained by Consumption: A Linear and Nonlinear Time Series Analysis

Jose Perez-Montiel () and Carles Manera Erbina ()
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Jose Perez-Montiel: Department of Applied Economics, University of the Balearic Islands, Palma 07122, Spain
Carles Manera Erbina: Department of Applied Economics, University of the Balearic Islands, Palma 07122, Spain

Sustainability, 2019, vol. 11, issue 16, 1-15

Abstract: This paper studies the dynamic relationship between consumption and investment in the United States between 1947 and 2018. Our findings support the postulates of Keynesian economics—while they are contrary to the theoretic background on which the numerous empirical studies on the saving-investment nexus are based. We find a long-run nexus between consumption and investment, and positive linear Granger-causality running unidirectionally from consumption to investment. Therefore, investment is sustained by consumption. Further, we find that the variables have nonlinear structures and, thus, we apply nonlinear causality tests. We provide evidence of nonlinear causality running unidirectionally from consumption to investment. Nevertheless, after controlling for Government Expenditure, this nonlinear causal relationship disappears, indicating that Government Expenditure drives the nonlinear causal relationship between private consumption and investment. We argue that this finding is consistent with the notion that investment decisions are guided by permanent aggregate demand, because public expenditure allows private consumption to have a sufficiently permanent trajectory to be considered as a guide for investment decisions. Our results do not support the austerity and deflation measures implemented in the last years (especially in the European Union). On the other hand, our findings call for the incentive of final public expenditure, since it favours the long-run link between the private decisions to consume and invest.

Keywords: nonlinear causality; consumption; investment (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2019
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